Liveblog: Index Ventures’ Saul Klein talks music

Moderator Ted Cohen (left) said that Index Ventures partner Saul Klein’s appearance at MidemNet is the highlight of this year’s show.

His first experience of the convergence between music and technology was in 1995 with a music recommendations company called Firefly, at a time when Index was investing in music site Listen.com, which was eventually rolled into Rhapsody.

Klein went on in 2002 to be a founder of the company that became Lovefilm – bought this week by Amazon – and also got involved with Last.fm. Index is now investing in Songkick, SoundCloud, Sonos, DoubleTwist and RjDj in the music sector.

“We have two core investment theses when it comes to the music space,” explained Klein.

“The businesses that are most interesting to us are businesses like Sonos that fundamentally change or improve the way fans or music lovers experience music. And the other businesses – Songkick is a good example of this, as is Viagogo – is in a world of content abundance, the thing that really matters is the unique experience. Live music is still the most live and social musical experience that you can get.”

Also important, though: none of these startups have to get licences from music rightsholders. “We’ve got a Jekyll and Hyde attitude towards dealing with content owners. It’s very challenging and it’s a cyclical market. But we had a great experience with Last.fm”, namely when it was bought out by CBS…

Cohen asked how startups should figure out who to pitch in the investment community. Klein compared the seed-stage funding business to A&R in the music industry. The hit rate for early-stage investing is “less than three out of ten” he explained.

So, Index looks at who it’s investing in – the entrepreneur and their team. “Do they have two bassists and no lead singer or the full complement?! But the biggest thing is how big is the market?.. We look for entrepreneurs who are looking to hit a hole in one every time.”

Cohen took the metaphor on – replacing the lead singer (the founder/developer/CTO in the startup case). Klein says Index invests hoping that the founder can go all the way, but recognises that if it’s their first time, they’ll need a lot of help.

“There are some founders who are capable of going the distance: it looks like Mark Zuckerberg is one of them, and Daniel Ek in this industry is one of them… Even with Apple, which is the ultimate founder-led company, it has an incredible kick-ass management team. It’s not just an individual.”

Klein also talked about startup culture in Europe, admitting that it’s young – 10-15 years old – but that it also beats itself up too much, with negative comparisons to Silicon Valley. He’s particularly fond of London, which he says “is fast becoming the Silicon Valley of Europe – the hub”.

Klein was asked about the fear of the exit strategy within music rightsholders – who complain about the risk of licensing content to a company who is simply using it to sell up to Google, or another big company. What are his views on that debate?

“We working with companies who are marathon runners, not sprinters,” he said in response. “Occasionally on that journey you get an offer you can’t refuse… My personal attitude and the attitude of Index is we’re not in a hurry to exit. We want to build a great business.”

Index also encourages its startups to focus on growth, rather than immediate profit. Cohen then asked Klein what companies he wishes Index had invested in, but didn’t. The reply? Pandora and Spotify in music, and Twitter in the social space.

“Those would be three companies I look back on and say we should have been much more aggressive in how we looked at those opportunities at the time.”

If licensing could be simplified, how much more VC and financing capital could the music industry receive? Klein says he dealt with this a lot at Lovefilm with the movie studios, where he argues the situation is worse.

“There is much more product in the music industry than there is in the movie industry,” he said. “Also, you can build a pretty amazing business in terms of revenues by not being in every market… Look at Spotify in Sweden. It is the number one source of income for the labels, not just digital, but physical as well. Period. Because it’s hit a certain amount of scale.”

He also cited Pandora and Netflix as examples of companies making lots of money from just one market. “Pick your market, win big and then go back and say ‘hey, what are you going to do for me now?’. Don’t obsess about this regional, global, intergalactic rights. Focus on a market, kill it, then go to another one!”

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